Existing borrowers may have to visit their branches to sign new contracts with their banks to replace the current agreements, it emerged yesterday.
Banks said they cannot prescribe how existing customers will use the excess cash on their monthly loan repayments following reduction in loan rates to 14.5 per cent, hence the requirement for branch visits, as the law capping cost of loans became operational on Wednesday.
“If customers want to pay off the loan within the shortest time possible…, we will sign a new contract and carry on with that. If the customer wants to reduce monthly repayments, that's still okay,” KCB's director for retail banking Annastacia Kimtai said. “That's why it is very important for our customers to visit us so they say this is what we are comfortable with. The customer is the one who will tell us 'this is how I want to replace the excess money'.”
The Banking (Amendment) Act 2016 signed into law by President Kenyatta on August 24 and gazetted on August 31, has capped interest the banks charge on loans at four percentage points above the base rate set by the Central Bank of Kenya. The amended law has also raised interest on term deposits to at least 70 per cent of the base rate, loosely translating to 7.35 per cent considering the 10.5 per cent Central Bank Rate – the presumed base rate.
Section 2 of the law prohibits banks from signing contracts to lend at an “interest rate in excess of that prescribed by law”. Lenders contravening this shall be fined not less than Sh1 million or the chief executive jailed for not less than a year on default under Section 3.
“It's a painful move at the moment for the whole industry definitely, but I believe the industry will come out stronger. We see this as a disruption but the market has seen these rates before, and they are not too bad rates,” KCB chief executive Joshua Oigara said. “The industry will have to be more innovative on how we look at our costs, new products of improving the market (and) growing our share. Affordable credit is also good for the economy.”
CBK governor Patrick Njoroge in a circular yesterday asked chief executives of the banks to comply with the amended law by September 14, in line with14 days requirement after publication.
Kenya Bankers Association late Wednesday said its members will comply, beating a haste retreat on August 24 stance that full compliance was dependent on gazettement of the law and its operationalisation regulations.
“KBA wishes to announce that its members have agreed to prospectively reprice existing loans, which will see existing customers enjoy the benefits of the new law once it is operationalised,” Olaka said in a statement late on Wednesday. “Each KBA member bank will, therefore, notify their customers on the process and new terms as the industry engages with CBK on the implementation.”
KCB, Co-operative, CfC Stanbic and Guaranty Trust Bank are some of the lenders that have publicly announced full compliance, an exercise likely to last from a few days to a month.
“We are very clear that there are many unanswered questions and a number of issues may not be resolved immediately,” CfC Stanbic chief executive Philip Odera said. “It may take us some time to revise all our offer letters and things that we need to do to communicate with our customers. However these benefits will be passed to all borrowing and depositing customers. There's no segregation.”
The lenders also allayed fears that the usually annual loan charges and fees could be inflated to meet targets in profit margins.
“No charge can be imposed by a bank before approval by the Central Bank,” Oigara said. “Typically, the way someone who is selling bread or any kind of products or the transport sector will increase (cost of) its product for fuel, that's how banks look at their charges as well because of inflation.”
On the Nairobi Securities Exchange, where the 11 publicly traded banks control about 42 per cent of the market value, there was mixed performance on the share price unlike Wednesday when there were gains across the board.
Housing Finance, I&M, Co-operative gained 9.86, 9.09 and 7.27 per cent, respectively, day-on-day. KCB, Equity, Diamond Trust, Standard Chartered and Barclays lost 5.41, 1.82, 1.41,0.52 and 0.51 per cent.d
Analysts at upstart Cytonn Investment have argued the Act is “oblivious of other factors that affect pricing of loans and deposits such as risk profile, term structure of interest rates, cost of funds and macroeconomic variables”.